A time capsule of the greatest financial mania in the history of mankind, told in real-time by regular folks and patriots. May future generations better understand the madness of crowds, and how power and money corrupt.

November 22, 2006

Headlines all over the UK papers tonight were about the housing bust that's coming.Morgan Stanley UK's chief economist, an advisor to Chancellor Gordon Browne, put out a report that said with certainty that the UK property market is overvalued and will burst."Housing Bust Likely in Next Few Years" Financial Times"UK Housing Market Bubble At Risk of Bursting" Ireland Online"Housing Bust a Certainty" London LiteHow do I know this is the end of the bubble in the UK? Because all manias throughout history have ended because of one thing:A change in perception.Not the wild overvaluation. Not the detachment from fundamentals. Not the unaffordability. Nope, it's the change in consumer psyche that causes bubbles to pop. Call it doubt. Call it losing faith, or losing nerve. Its when people go from thinking "it's a sure thing" to "hmmm.. It looks like this is the peak - I should get out now"Here's today's report. Get ready now for the panic.

UK housing market bubble at 'risk of bursting'

The housing market is likely to bust within the next few years, a prominent economist and former advisor to Gordon Brown will warn today.

The Financial Times reports David Miles, chief UK economist at investment bank Morgan Stanley, has written a report arguing that house price growth has been grounded in unrealistic expectations of double digit annual rises.

Mr Miles says it is only possible to explain the more than doubling of house prices in the past decade if people’s demand for housing has been heavily influenced by expectations that rapid price rises would continue.

Once house price rises come down below expectations, Mr Miles believes “significant” falls are likely.

The report concludes: “A sharp fall in real house prices is likely at some point in the relatively near future, though it could yet be one to two years away.”

The Financial Times says that buoyant expectations of price rises, based on home owners’ experiences over the past five years, have fuelled demand and driven prices even higher.But these prices are a “bubble”, which will deflate rapidly once price rises fail to meetexpectations.

Mr Miles’ comments were echoed in May by Mervyn King, governor of the Bank of England. Mr King added: “The level of house prices still seems remarkably high relative to average earnings or average incomes or anything else you could look at.”

Now, don't go dissing our illegal immigrants; they are going to be our mercenaries working toward citizenship in the years to come. I, for one, like immigrants in general but I'm not too fond of illegal immigrants because the way that they've been allowed into the country is too bassackwards to work out in the long run.

Keith, Why do you believe certain markets such as Los Angeles and Orange County are taking so long to start the correction. Especially since the PE is so out of whack? It seems so obvious that with a 63K avg sallary a 690K house will knock you into bankruptcy? Also most sellers should say to themselves as a test, can I or the majority of my neighbors buy this house? If the answer is no, then guess what the potential buyers are thinking the same thing. Why is this so difficult to understand?

The first markets to drop are those that have the highest percentage of speculator driven demand, due to speculators trying to exit the market much quicker than an actual resident homeowner. LA County and Orange County has had less speculative demand as a percentage of all demand than say Riverside County or Sacramento or San Diego. But make no mistake about it, that PE you speak of will most certainly cause the LA and Orange county markets to fall. It will just happen a little bit later when a greater number of resident homeowners start seeing their mortgage payments rise and they are forced to either sell or foreclose. Those counties will also be the first to comeback, though, as they have a greater amount of new non-speculative demand (people who really want to own there over the long haul) which will start pushing up prices again once the overleveraged and the speculators have all been purged.

I don't know. Last night read in the Economist that prices on homes went up 9.5% in nine Australian cities and up 47% in Perth this year to the third quarter.

Last year there was talk of how over-heated their market was and then the fear the bubble would burst, a contraction and draw back in sales, a slight decrease in prices and now this?

I had posted some stats from the Economist from June 2005 that showed Five major countries outside the USA that showed the increase in price in other countries from over 112% to 221% where the USA was only 73% and Australia was in the top four and now this? If gauging markets and potential outcomes by these countries I think the USA has a long way to go before a "historic meltdown."

I am beginning to believe that the past year has been a "touch and go" and ready for another slight take-off in the spring barring a major calamity or war.

With the stock market booming I think they money game isn't over yet. I do believe a correction will have to come and the sooner the better but I'm beginning to doubt it has arrived.

What do you think of what has happened so far in those markets that are way higher than ours?

Australia (like Canada) has benefitted from a huge commdities boom the last 6 years. If you think our stock market has done well the last few years, take a look at Australia's All Ordinaries. They might not be the best example to use to compare with US housing. When European housing markets start dropping, that will be more analagous to the US market.

Perth's property is going through the roof because of a resources boom over there; it's purely local factors. I assume there's some flow-on affect to other markets. On the other hand, there've been properties selling in western Sydney for 60% off the peak, and stories of forclosure sales being handled very quietly to avoid spooking the market.

Sorry about this but it's tiring to have to re-write the following points on the collapse of the UK finance based economy...

The entire UK's economy is the London financial services industry.From a fundamentals pov, England hasn't produced anything since the fall of the Empire cerca 1965-1972.

So in a way, London's like NYC but without a country like the USA adjoining it. And if American corporations don't get their acts together soon, then the US will also go the way of England but at least there's some twenty years left of productive value in the States.

So, when there are other chic/happening cities like Amsterdam, Paris, or Milan for rich, globe trotting bankers/oil men/movie stars, why would they buy up 90-100% of the UK's properties just to help out the average Briton with an ARM? I think those posh places in Chelsea are already accounted for and the country's RE has only one way to go... down.

---

"I hear the russians are especially interested in converting their wealth into UK assets so that when the government tries to steal the money back, it'll be overseas."

The only UK assets are RE, Pound Sterling, and Hedge fund shares/equity. So there's a limit to the diversification going on over there unless the foreigners are going to buy all of the UK.

Well, condos in NYC are also a million dollars per unit so it's one of those chic cities where rich people buy places, however, unlike NY, London is the only economy for the whole of the UK. If anything, RE in England is the South Sea bubble all over again except that this time, there's no USA to emigrate to for the average Briton like three centuries ago, whereas the US, still has a military-industrial research complex, raw materials (esp coal), biopharma, foodstuffs, etc so the collapse of America's service sector wouldn't destroy the country, it'll spawn a painful one or two decade bear market (ala depression) whereas England's toast if their hedge funds go belly up or the rich ex-Soviets start to look at Amsterdam or Copenhagen for places to buy. And to be frank with you, if I were rich, I'd much rather hang out in those places over England.

-----

"When the global economy melts down or world war breaks out, the question is where will you want to be? In London or Jerusalem? In Seattle or Damascus?"

When did banana republics vs real nations become the highlight of the issue?

If anything, Ottawa Canada is the safest place in the world and its real estate is the most affordable for a modern, developed, beautiful city by a river. The difference between Ottawa and London is that London serves a dual nature of being a hedge fund center (a.k.a. UK's NYC) and in a developed first world nation away from places like Russia or Syria.

So when a place is oversold, real estate in New York City, Vancouver, or London, it becomes another phenomena of overvalued parcels of land and units where the expectation is that the rich are going to soak up everything, keeping the average middle class person asset wealthy via the creation of a localized wealth effect. That's a bubble zone. A rich oil man can buy one or two units in London to meet with his broker, a mansion (or two) in Ottawa a/o Oslo for his multi-acre landed estate, and a basket of currencies including the pound, loonie, usd, euro, corona, and a pile of gold/silver all over the US, Canada, Australia, Germany, and England and the chances are that he'll retain his wealth even if there's an overthrow of his govt in Bahrain. Simultaneously, he's hedged his bet because not all major cities are going to implode 1990s Tokyo-style so his private RE holdings are nicely diversified to hold up during market downturns. I mean a lot of multi-millionaires got roasted because they'd bought hotels in Toyko in the 1980s thinking that they'd retain their RE equity, not to find themselves in an illiquid position costing them ten years later.

-----

::They say the wealth of the top .01% has increased 600% in 20 years. Has your paycheck? At that increase I guess 20% appreciation a year say in London sounds like a bargain buy.

Yes, I agree with the localization of the wealth effect and for that exact reason, Manhattan apartments average 1 million dollars per unit. But now think about this... the rich can only make money if they have an asset class that's of value to a certain number of people. So, when people find that living in NYC is too expensive for the *average* blue chip professional, earning $400K/yr, then that crowd, the upwardly mobile but not too rich gang loses interest in a region and moves into cheaper locales in New Jersey, Putnam, Rockland, and Nassau counties in NY state and then even offices, which handle the transactions for the wealthier clients, move there as well, once the body count reaches critical mass. And this is pretty much what happened to Tokyo, during the 80s, as all kinds of rich people started buying downtown properties at prices equivalent to owning entire city centers in places like Boston, Houston, and Philly. Well, at that point in time, the well off manager salarymen (~$400K/yr) at Japan Inc moved 2 hrs away and the entire city of Tokyo became one speculative region for land/units via rich RE players (including organized crime bosses). The rest is history. And the problem is that that's the issue, there are only so many Malibus, Hamptons, etc out there for the top 0.001%. The other top 0.5% also need places to live in and it's this crowd which keeps RE alive in happening regions.

------

Someone else concurs:

"And the problem is that that's the issue, there are only so many Malibus, Hamptons, etc out there for the top 0.001%. The other top 0.5% also need places to live in and it's this crowd which keeps RE alive in happening regions."

Yep, high end enclaves are pretty much scoped out in much of the world. There are practically no "perfect" private beach castles in Tahiti, available for the average Japanese, European, or North American nowadays. Those places have already been bought out by millionaires or resort conglomerates which is why French Polynesia is one of the most expensive Pacific Island regions in the world.

In order for real estate to maintain an upward holding pattern in London, Sydney, NYC, or Los Angeles, the upwardly mobile professionals need to feel like they can afford to be a part of the action to generate the volume needed to create a real estate market or otherwise, we get a Tahiti situation where there are billionaire recluses and tourists hotels but no professional class buying places to live in.

It's a new paradigm, and everybody who doesn't buy, now, will be priced out forever. Anybody who does buy will be rewarded with a lifetime of riches, as their property will continue its 30% yearly price increase.

Renters, and anybody born in a future generation, will not be able to afford a £10,000,000 starter home in 15 years. They will live in tent cities, and Hondas.

This asset bubble is different than all of the others - it will never slow down, or pop. The gains are permanent.